For all the talk about developing and protecting the “free market” economy, there is one crucial piece of the picture that the global power structure has conveniently left out: Currencies. The folks in Washington love to talk about the power of the American free enterprise system and of western capitalism. At the same time, they push for severe currency regulation and intervention. So how can currencies, the very marrow of any financial system or economy, be seen as exempt from the rules of free market economics? Can we really have a heavily regulated currency system backing a deregulated free-market economy?
If you asked this question of the “founders” of free market economics, they’d probably roll over in their graves. Twice. Friedrich von Hayek, often seen as the father or modern capitalism, once said that, “With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” He was awarded the Nobel Prize shortly thereafter.
The problem of course is that free market currencies are messy when you’re working on the time scale of a two-year electoral cycle. Everyone knows that incumbent politicians tend to lose their jobs when the economy isn’t booming. Yet economies do not boom forever, and thus those looking to hold onto their elected positions do not tend to take kindly to short term slowdowns in economic growth. It’s much easier for them to push for the creation of more money with which to stimulate the economy in the short term, and in doing so, buy themselves a few more votes and a couple more years in office.
Manipulating monetary policy also has another side effect: it allows governments to raise taxes, without raising taxes. Since 1980, the US dollar has lost more than 80% of its purchasing power, chiefly because of the continual increase in the money supply and monetary base (how many dollars are in circulation). As more dollars have entered the market, the value of the existing one’s has gone down. So the government gets money to spend and doesn’t have to raise taxes. The problem is that the $100,000 you had under your mattress in 1980 is now only worth $20,000 in terms of its current purchasing power. So your savings are depleted and the government has more money to spend. Doesn’t that sound like taxes? Imagine if congress passed a bill tomorrow saying they will tax 80% of all wealth held by Americans over the next 30 years. There would be riots on the street. Yet when they do it through currency manipulation, no one seems to notice.
Now there are finally a few bright points appearing in this struggle to free currencies from the grips of politics, and interestingly enough they all seem to involve gold. At this very moment, there are no less than 13 states exploring the idea of issuing their own currencies (most involving precious metals) with which to combat the insanity in Washington. Utah led the charge last year when Governor Gary Herbert signed a law allowing gold and silver coins to be used as common currency for public and private debts, without taxation or capital gains. In other words, Utah has made gold and silver real, active currencies, no different from paper dollars.
Two of the three remaining Republican presidential candidates have been actively calling for commissions to investigate a return to the gold standard. Minnesota, Tennessee, South Carolina, Georgia, Iowa, and Washington State to name a few, may well be on their way to developing precious metals backed currencies of their own. I guess their idea is relatively simple: if private citizens can protect themselves by exchanging their dollars for gold, individual states should be able to do the same thing.
So is the age of currency manipulation coming to an end? Don’t bet on it. There is too much at stake for those currently in power should they lose the ability to control the timing of economic cycles and impose phantom taxes on their constituencies. Still, as it always has, gold is beginning to quietly shine through as a private solution to this growing public problem. No matter what the ladies and gentlemen in Washington decide to do with their paper, they can’t seem to stop gold from becoming the currency of choice for those who don’t want to buy into our increasingly ineffective financial system. Heaven knows if politicians could just print gold it would solve all their problems. Let’s all be thankful that they can not.